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It has been about a month since the last earnings report for Texas Instruments Incorporated TXN. Shares have added about 12.6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is TXN due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Texas Instruments Q1 Earnings & Revenues Beat Estimates
Texas Instruments’ first-quarter 2018 earnings of $1.11 per share exceeded the Zacks Consensus Estimate of $1.21. Earnings increased 36% year over year and 11% sequentially.
Revenues of $3.79 billion beat the Zacks Consensus Estimate of $3.65 billion, up 11.4% on a year-over-year basis and 1% sequentially. Also, it came at the higher end of the guided range of $3.49-$3.79 billion, driven by strong demand for Analog and Embedded Processing products in the auto and industrial markets.
Following first-quarter results, shares rose 5.62% in after-hours trading, driven by strong demand in the auto and industrial markets. Also, strong top-line outlook could be one of the reasons for surge in the share price.
Segment wise, growth of analog and embedded processing applications business was strong. These typically yield a more stable business as well as strong margins. The Other segment declined year over year.
Texas Instruments continues to prudently invest its R&D dollars into several high-margin, high-growth areas of the analog and embedded processing markets. This is gradually expanding its exposure to industrial and automotive markets, while reducing the same in volatile consumer/computing markets, and increasing dollar content at customers..
Internally, the company has always executed rather well. It, along with chipmaker Intel (INTC), is one of the few semiconductor companies that depend on internal capacity for manufacturing the bulk of its devices. Since the company usually builds out capacity well ahead of demand, it is able to make opportunistic purchases. As a result, it is able to contain capex at up to 4% of sales, even while expanding its business.
The company remains focused on increasing free cash flow per share and strengthening competitive advantages. Overall, we remain optimistic about its compelling product line, differentiation in business and manufacturing efficiencies that include growing 300-millimeter Analog output. However, risks associated with a high debt level persist.
Let’s see what the numbers say.
Revenues in Detail
Analog, Embedded Processing and Other segments generated 68%, 25% and 7% of quarterly revenues, respectively.
Analog, which includes Power, Signal Chain and High Volume products, was up 14% from the year-ago quarter to $2.6 billion. The year-over-year growth was driven by strong performance in the product lines — power and signal chain.
The Embedded Processing segment, which includes Connected Microcontrollers and Processors, was up 15% year over year to $926 million. The year-over-year growth was driven by stronger sales across both the product lines — processors and connected microcontrollers.
The Other segment, which includes DLPs, custom ASICs and calculators, was down 13% from the prior-year quarter to $297 million.
Texas Instruments’ gross margin of 64.6% was down 48 basis points (bps) sequentially but up 156 bps from the year-ago quarter. The company’s gross margin has been improving consistently with more production shifts to its 300 mm line.
Operating expenses of $899 million were up 2.5% sequentially and 0.8% from the last year. Operating margin was 40.9%, down 82 bps sequentially but up 405 bps from the year-ago quarter.
Balance Sheet and Cash Flow
Cash and short-term investments balance was $4.1 billion compared with $4.5 billion in the prior quarter.
The company generated $1.1 billion in cash from operations, spending $189 million on capex, $873 million on share repurchases and $611 million on cash dividends. Free cash flow at the end of the first quarter was $923 million.
At quarter end, it had $3.6 billion in long-term debt and $500 million in short-term debt.
The company provided guidance for the second quarter.
It expects revenues between $3.78 billion and $4.10 billion (up 4% sequentially at the midpoint).
Earnings for the quarter are expected to be in the range of $1.19-$1.39 per share.The guidance includes an estimated $10 million discrete tax benefit.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been 12 revisions higher for the current quarter. Last month, the consensus estimate has shifted by 6% due to these changes.
Texas Instruments Incorporated Price and Consensus
Texas Instruments Incorporated Price and Consensus | Texas Instruments Incorporated Quote
At this time, TXN has a nice Growth Score of B, though it is lagging a lot on the momentum front with a D. Following the exact same course, the stock was also allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth based on our styles scores.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise TXN has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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